| One of the integrated Southern region player; Extensive distribution network
PCIL’s market share in terms of total cement sales volume vis-a-vis total demand in South India is estimated to be ~6 to 7 percent in FY2022. As of March 31, 2022, PCIL’s cement and clinker production capacity represented ~6 percent and ~6.5 percent, respectively, of the total cement production and clinker production capacity, respectively, in South India, comprising Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Andaman and Nicobar Islands, and Pondicherry. PCIL, a regional player, has a strong hold in the local market they are operating in, due to cost leadership and market advantage along with proximity to raw material sources. Besides, PCIL operates an integrated facility supported by infrastructure for limestone extraction and crushing, production of clinker and cement by inter-grinding clinker along with fly ash/ slag/ gypsum, packing facilities and quality control lab. PCIL operates 4 integrated manufacturing facilities and 2 grinding units with an aggregate cement production capacity of 10.00 MMTPA, as of March 31, 2022.
PCIL’s business operations are supported by an extensive sales and distribution network spread across South, West and East India. PCIL’s cement products are sold to the trade segment (which typically incudes retail customers and wholesale customers including dealers and distributors who then resell products to retail customers) and the non-trade segment (which typically includes government and private infrastructure projects, real estate companies, and ready-mixed concrete stations). In FY2020, FY2021 and 2022, sales to the trade segment were 53.45 percent, 51.04 percent and 48 percent, respectively, of its total gross revenue. PCIL has developed long-term relationships with its dealers and distributors, with its distribution network comprising ~3,000 dealers and distributors as of March 31, 2022.
Acuité believes that PCIL’s eastablished position in the Southern region and Integrated facilities along with extensive distribution network will aid its business operations going forward.
Strategically located manufacturing facilities with close proximity and access to its key raw materials
PCIL’s facilities are strategically located to enable access to markets such as Hyderabad, Vishakhapatnam, Bengaluru, Chennai, Pune and Ahmednagar, which provides significant convenience in logistics management and cost benefits. Each of its facilities are well connected to both the national highway and railway network which provides easy access to the transportation of laterite, coal, clinker, gypsum, slag and cement, as required. In addition, its Krishnapatnam grinding unit is located at approximately less than 280 kms, 290 kms and 320 kms from its integrated manufacturing facilities at Talaricheruvu, Boyareddypalli and Ganeshpahad, respectively, while the Patas grinding unit is located at approximately less than 418 kms from its Tandur facility. With Krishnapatnam grinding unit, packing terminals at Cochin, Gopalpur, Karaikal and Colombo ports and proposed packing terminal at the Kolkata port, PCIL is likely to become one of the few market players in India with superior port- based logistics infrastructure and distribution facilities. Efficient raw material sourcing of limestone, gypsum and fly ash, and coal, in close proximity to its integrated manufacturing facilities, has a direct result on cost of production and profitability as well as ensuring protection against operational risks.
Further to meet its coal requirements, PCIL’s facilities are supported by a 77.00 MW captive power plant, at Ganeshpahad facility, along with WHR units with an aggregate capacity of 32.00 MW, at Ganeshpahad and Boyareddypalli facilities. PCIL met ~48 percent of its power requirements through captive sources in FY2022 against 53.03 percent in FY2021. Further, it optimizes its coal procurement by sourcing coal and pet coke from the international markets and coal through coal linkages with Singareni Collieries Company Ltd (SCCL) located in the state of Telangana. PCIL depends majorly on imports for its coal requirement; it imported 93 percent of its total coal required in FY2022 against 95.5 percent in the previous year. For Limestone, PCIL has 7 captive long term mining leases for its integrated manufacturing facilities, which are pit head mines having a lead distance of within 6 kilometres which provides its integrated manufacturing facilities with a stable and timely supply of limestone in a cost efficient manner. The residual reserves of PCIL’s mining leases with respect to the mines currently operated are sufficient for its current production capacity for at least 32 years, based on the stipulated amount of annual excavation specified in its mining leases.
In addition to utilizing fly ash from captive power plant at Ganeshpahad facility, PCIL procures fly ash from other coal-fired power plants located near its integrated manufacturing facilities. For Krishnapatnam grinding unit, the company has been able to access relatively low cost fly ash by virtue of being in close proximity to fly ash sources. Further, it obtains gypsum and slag from nearby fertilizer companies and steel manufacturing plants, respectively.
Acuité believes that PCIL’s strategically located manufacturing units and packing terminals, together with port based logistics infrastructure and distribution strategy, would provide PCIL access to the coastal markets and will also enable it to serve markets in East and West India along with improvement in its logistic and EBITDA per MT cost.
Higher-than-estimated improvement in Operating income in FY2022
PCIL’s total operating income grew by a compounded annual growth rate (CAGR) of ~16 percent over the period FY2020-22 supported by exponential growth in FY2022 and FY2021 with other years witnessing a flattish growth. PCIL reported Y-o-Y higher total operating income of Rs.3,204.21 Cr in FY2022; surpassed Acuité’s estimates by a modest margin and reported 29.39 percent Y-o-Y growth in FY2022. This was supported by higher capacity utilization of 66.9 percent in FY2022 vs 54.3 percent in FY2021. The growth was a combination of 22.6 percent growth in volume coupled with mere 2.3 percent increase in the realization/MT. The net revenue realization/MT improved from ~Rs.4,500/MT in FY2021 to 4,600/MT in FY2022. The key revenue drivers in FY2022 were a) increasing contribution from Krishnapatnam and Pune cement grinding plant along with existing grinding units leading to higher production; packaging terminals at key ports which helped achieve higher volumes in non-southern regions b) increasing contribution from Non-southern regions like West, East and SriLanka and c) improvement in realization/MT.
Promoter’s fund support and stake sale in Anrak Aluminium Ltd to aid liquidity to an extent; NCDs to take care of the Phase 1 capex creditors/reimbursement
PCIL’s promoters have infused Rs.80.00 Cr in H1FY2023 to fund the losses at PBT level and are further expected to infuse fund in H1FY2023 (roughly Rs.200 Cr) to support its operations. The promoters are further expected sell its stake in Anrak Alumium and infuse ~Rs.1,000 Cr in PCIL to fund the Marwar cement’s capex and the capex at PCIL level. However, they are also expected to load further debt of Rs.1,400 Cr to complete the Marwar capex which remains critical from the further leveraging point of view at PCIL balance sheet. Marwar cement is a 100 percent step down subsidiary of PCIL. The total project cost of setting up 3 MTPA clinker, 2 MTPA cement plant at Jodhpur and 1.5 MTPA grinding unit at Bathinda is Rs.2,043 Cr. The proposed funding pattern is equity to debt of 30:70. Of the equity portion (30 percent) which is Rs. 613 Cr, the promoter has already spent Rs.350 Cr as on date. The balance Rs.263 Cr will be infused by promoter by sale of stake in Anrak. The proposed debt is yet to be tied up.
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| Moderate capacity utilization
Owing to the oversupply situation in south India, the company continues to operate at moderate capacity utilization levels, which was 66.9 percent for FY2022 (PY: 54.3 percent).
Highly susceptible to volatility in input cost and realisations, and cyclicality in the cement industry; cost headwinds hit hard in FY2022 and H1FY2023
Capacity addition in the cement industry tends to be periodical because of the long gestation period for setting up a facility and the numerous players adding capacity during the peak of a cycle. This leads to unfavourable price cycles for the sector. Moreover, profitability remains susceptible to volatility in input prices, including raw material, power, fuel and freight. Realisations and profitability are also affected by demand, supply, offtake and regional factors. PCIL remains exposed to fluctuations in fuel prices in addition to the risks of volatile cement prices, given the oversupply situation in South India.
PCIL reported lower-than-estimated Earnings before Interest, tax and depreciation (EBITDA) in FY2022 at Rs. 469.96 Cr; missed Acuité’s estimates by a huge margin. The resultant was on account of higher power cost and logistic/fuel cost which it could not pass on despite cost rationalization capex undertaken in last 2-3 years of time. The EBITDA margin was lower against estimates due to higher-than-expected coal and pet coke prices in H2FY2022 and H1FY2023. Prices of key input materials required to manufacture cement such as petroleum coke, coal and diesel have sharply risen on a Y-o-Y and Q-o-Q basis during this period.
The EBITDA/MT reached lowest to Rs.111/MT in Q4FY2022 from Rs.1,100/MT in Q1FY2022; further improved to Rs.300-400/MT; remained sub-par to industry levels. The aforesaid decrease was on account of power cost/ MT rising from Rs.1,350/MT in Q1FY2022 to Rs.2,100/MT in Q4FY2022. The poer cost/MT remained high in H1FY2023 at Rs.2,200/MT. The power cost and logistic cost have been the major contributor to its total costs. Acuité believes that PCIL’s ability to do better inventory and price management and ability to pass on the price hikes would remain crucial for the rating over the medium term.
Leveraged, weakening of key credit metrics
The tangible net worth of PCIL stood at ~Rs.1,084.29 Cr. as on March 31, 2022 visi-a-vis Rs.1,153.30 Cr as on previous year. The gearing (debt to equity ratio) stood at 1.16 times as on 31 March 2022 (1.17 times as on March 31, 2021 and 1.36 times as on March 31, 2020). The total debt stood at ~Rs.1,206.54 Cr as on March 31, 2022 as against Rs.1,351.95 Cr as on March 31, 2021. Debt/EBITDA stood at 2.66 times for FY2022 as against 2.24 times in the previous year. Besides the on balance sheet borrowings, PCIL has significant contingent liabilities on account the guarantees provided to its group companies. The debt service coverage ratio (DSCR) stood at 0.95 times as on March 31, 2022 vis-à-vis 1.27 times as on previous year and interest coverage at 2.08 times in FY2022 compared to 2.63 times in FY2021. Acuité believes that any major deviation in the Debt / EBITDA will impart a negative bias to the rating over the medium term.
Dropping of IPO; capex on hold
PCIL intended to utilise a reasonable portion of the Net Proceeds for funding its on- going/upcoming capital expenditure requirements which includeed, inter alia, purchase of electrical equipment, and plant and machinery amongst others. PCIL plans to utilize Rs.425 Cr for the balance capex of Phase-I. PCIL was in progress of launching an Initial Public Offer (IPO) worth Rs.1,550 Cr which included fresh issue of equity shares worth Rs.1,300 Cr and promoter stake sale (33.41 percent stake of P.R. Cement Holdings Limited) through offer sale amounting to Rs. 250 Cr. PCIL was awaiting SEBI’s approval and the issue was expected in September 2021. The net proceeds from the IPO were expected to be utilized towards partial repayment/prepayment of existing debt, towards capex and for general corporate purposes. The IPO was expected to de-leverage its balance sheet with improvement in key credit metrics as well as liquidity to an extent.
PCIL was still underway to complete its Phase-I of Capacity expansion plan which included doubling of grinding capacity at Krishnapatnam unit to 4MMTPA, Upgrading the raw grinding and cement mill at Talaricheruvu, setting up WHR plant at Talaricheruvu and Tandur and packaging terminal at Kolkata Port. PCIL has estimated the total cost of such capital expenditure to be Rs.530.91 Cr (of which Rs.85 Cr has already been incurred). Besides, PCIL had Phase-II of the capex which is expected to be taken up simultaneously to expand its reach in the North and Central India. PCIL planed to set up cement manufacturing facility with a proposed clinker production capacity of 3.00 MMTPA and cement production capacity of 2.00 MMTPA in Jodhpur, Rajasthan and two grinding units in Kathuwas, Neemrana, National Capital Region and Bathinda, Punjab with a proposed cement production capacity of 1.50 MMTPA and 1.0 MMTPA, respectively, which is expected to be operational by the Q4FY2024. The aforementioned capex was to be supported by a WHR plant of 15MW.
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